Commodities | Mar 23 2011
By Gavin Wendt, Founding Director & Senior Resource Analyst MineLife Pty Ltd
The reactions of financial markets around the world to the horrific events that have taken place in Japan have been reasonable and entirely predictable. Markets that were already nervous from the ongoing political unrest in MENA, ongoing European debt woes, rising oil prices and fears of an outbreak of inflation, have used the Japanese catastrophe as the lever they needed to take money off the table.
There will undoubtedly be a near-term negative impact on both Japanese economic growth and those countries that trade with Japan, as well as demand for some commodities. Nevertheless, it’s always important to focus on the bigger picture in any circumstance.
Therefore looking past the immediate problems faced by Japan, I can envisage a much more positive scenario based on an economic and physical reconstruction effort unlike anything seen since the end of WWII. This will be positive for Australian commodity exporters.
Let’s focus on the immediate impact on uranium. Understandably, there has been significant pressure on uranium stocks over the past few days. This has been reflected in the 10% fall in the spot uranium price to $60.00/lb. Media headlines have questioned the future of the world’s nuclear industry, both now and in the future.
To put things into perspective, Japan has 55 operating nuclear reactors, 11 of which have been shut down as a response to the earthquake and 4 of the 11 have been significantly affected by both these events. There are currently 440 nuclear reactors worldwide generating about 15% of global electricity. With 11 reactors off-line in Japan, this represents an approximate 2.5% decrease in reactors generating electricity.
What we can expect is a reassessment on the part of nuclear energy nations of the security of their existing reactors, as well as those on the drawing board, with respect to their integrity in the face of potential damage caused by natural disasters and acts of terrorism. Germany has indicated that it will impose a three-month suspension on the recently implemented law to extend the life of the country’s 17 reactors, in order to analyze the impacts of the Japanese situation.
The key is that there are relatively few options available to the world in terms of providing base-load power. Given the seeming desire to diversify away from coal-fired energy, this essentially leaves governments with the choice of advancing nuclear power and LNG. Governments like China are utilizing a combination of coal, LNG and nuclear energy.
In the US, 20% of the nation’s electricity is supplied by 104 nuclear reactors. President Obama has previously sanctioned US$36 billion in government-backed loan guarantees as a way of accelerating the nation’s nuclear industry. The latest comments from US Energy Secretary Steven Chu have reaffirmed the country’s commitment to nuclear power.
One of the biggest winners out of all of this is likely to be China, which always manages to focus on the bigger picture. As reported by Bloomberg on March 14, China National Nuclear Corp, which began operations at its first overseas uranium mine last year, may acquire more global atomic-fuel assets to meet rising demand, according to its President Sun Qin. The pace of China’s nuclear power development won’t be affected by the nuclear accident in Japan, according to Sun.
The decision by China’s biggest nuclear plant operator to potentially implement a detailed overseas uranium business expansion plan follows China Guangdong Nuclear Power Group Co’s recent US$1.2 billion bid for Kalahari Minerals Plc (which has a 43% stake in Extract Resources). The gloom in uranium markets couldn’t have been better timed as far as China Guangdong is concerned.
The Chinese recognize a bargain when they see one and I am confident that this will be the first of many corporate forays by the Chinese in the current depressed environment as they look to secure their nuclear future. China National Nuclear aims to increase generation capacity to as much as 20 gigawatts by 2015, which would account for more than 50% of the country’s total capacity. In fact China’s National Energy Administration said back in July last year that China may have up to 39 gigawatts of reactors by 2015.
The history of the past 30 years in the uranium industry with respect to incidents at Three Mile Island in the US and Chernobyl in Russia, demonstrated that base demand did not fall, as existing reactors were not shut down. Older reactors will be reassessed and some will see early decommissioning, but the reactor construction programs underway in places like Russia, China and India will continue.
Modern-day reactors are much safer than the problematic older ones, but if there is a lower level of investment in nuclear power, this in turn could well generate higher prices due to supply tightness. I am confident with respect to the medium to longer-term picture, but also anticipate that uranium prices and uranium share equities should begin to recover during H2 2011.
All views expressed are the author's, not FNArena's (see our disclaimer).
